SYNOPSIS: Paul Krugman debates Robert Barro on the day before Election Day 2004

CHARLIE ROSE: Ralph Reed, Harold Ickes, thank you very much for joining us.

HAROLD ICKES: Thank you.

RALPH REED: Thank you, Charlie.

CHARLIE ROSE: We'll be right back. Stay with us. With only days until the election, domestic policy remains as much a concern for Americans as Iraq or national security. Joining me now two leading economists, Paul Krugman and Robert Barro. Krugman is a professor of economics and international affairs at Princeton. He's also a columnist for "The New York Times" and author of the book, "The Great Unraveling," which is now out, as you can see, in paperback. Robert Barro is a professor of economics at Harvard and columnist for "BusinessWeek" magazine. The second edition of his book, "Economic Growth," has recently been released by MIT Press. I'm pleased to have both of them at this table. Are tax cuts for the rich good for economic growth, for those people who make in this -- using the political numbers of our time, people who make more than $200,000 a year?

PAUL KRUGMAN: Not if they add to a budget deficit. Not if they are, you know, not if -- if whatever arguments you can make for them are outweighed by the fact that it is adding to the amount of money the government is borrowing.

CHARLIE ROSE: I'm trying to get at this question. So, what is the basic difference between the two of you with respect to where this economy is and what it needs?

PAUL KRUGMAN: We have differences about what -- what's effective for the economy as well, but the biggest difference is value. I want to maintain the social insurance institutions. I want to maintain Social Security, Medicare and Medicaid. And I actually like -- I want some from further expansion of health insurance. So I say look, you know, we don't have enough revenue as is. I don't want more tax cuts that will further undermine the revenue base that makes it possible to have these programs that -- that sand off some of the rough edges of capitalism. And Robert will have to talk for himself on how he wants to go. But that's -- you know, basically -- let -- let me put it this way. If you are going to ask me about the Bush tax cuts, is the criterion, is the economy in better shape now currently than it would be if nothing had been done? Probably. Are we better off.

CHARLIE ROSE: It's in better shape if nothing had been done.

PAUL KRUGMAN: If there had been no stimulus program at all.

ROBERT BARRO: No, he didn't mean that.

PAUL KRUGMAN: No -- if -- do -- no, I think that the economy -- I think it was -- it was -- we got some stimulus out of these tax cuts.

ROBERT BARRO: No, I disagree with a lot of this. Because I think where we are now, which is actually quite a good economy -- owes quite a bit to the 2003 tax cut plan. And I -- I should distinguish a lot between the 2003 and 2001 tax cut plans. They are really quite different. The big thing about the 2003 plan is that it didn't just heap money to people. It didn't just particularly give money to people at increased incentives to do things. It did that particularly by accelerating the marginal income tax rate cuts. It did it by cutting some of the tax rates that pertain to saving. It motivated people to work more, to enhance productivity, to increase investment. It worked great. I mean, since early 2003, the economy has done extremely well. And I -- I can't prove it for sure, but I think it is a very convincing case that that tax cut in 2003 was a lot responsible for it.

CHARLIE ROSE: But what about his basic argument that there is a difference in terms of value judgment here, in understanding distinctions between the two of you?

ROBERT BARRO: It is not on the first order of . . .

CHARLIE ROSE: Philosophies.

ROBERT BARRO: . . . value judgment. I mean, I think mostly about how do you raise taxes in an efficient way, how do you maintain and stimulate...

CHARLIE ROSE: Raise taxes or -- collect taxes?

(CROSSTALK)

CHARLIE ROSE: Right, right, right, right.

ROBERT BARRO: Excuse me, how do you collect tax revenues in an efficient way. How do you promote economic growth.

CHARLIE ROSE: Right, right.

ROBERT BARRO: And the basic way you do that is you cut the taxes where they start out having the highest rates. Now, a lot of that at the moment is among the rich people. It used to be it was more at the poor people. Though we've actually done a lot on that with respect to the earned income tax credits, so it is not so true now. But the way you really enhance the economy and make it work better is by cutting tax rates where they start out being the highest, because that is where the government is initially distorting the situation the most. And the reason I like the 2003 program is it basically did some of that.

PAUL KRUGMAN: I have to say, if you think that this is a good economy, I would like you to go out there the last few days, go out to Ohio and -- and say this. And it will really -- that help the election move in a direction, I think, that is probably a good idea. Like John Snow saying that -- that the loss of jobs is a myth. It's -- look, we've had a year of pretty good GDP growth. Very -- you know, very good, but not -- not overwhelming. But jobs, job growth over the past year has been just kept pace with population growth. And this is not -- considering the enormous shortfall -- this is nothing to get excited about. And you know, there -- there -- beyond that, there is this question, how are you going to pay for the government, how are you going to pay for the things that people expect the government to do? You have to do it somehow. And -- or you have to cut back sharply on what the government does. Robert, you have written about -- and you are supporting starve-the- beast, as a doctrine. And -- which is, you know, cut revenues and then we can use that to -- to squeeze down government spending. You know, I'm not in favor of that. I think that the government does important stuff. And I don't think there is a lot of -- you know, there is -- basically, we have this $400 billion deficit. It's got -- it is not going to go away simply through economic growth, it has to be some combination of either spending cuts or increased revenue. And I don't like these tax cuts, which are force -- which will eventually force a cut in programs that I think are very important to people's lives.

ROBERT BARRO: You know, I don't like everything about the policy programs of the Bush administration. But I try to give them credit for the things that they've done that are -- that are good. The economy is growing at almost 5 percent in real terms over the last four or five quarters. That really is a very strong performance. The unemployment rate has come down a full percentage point. And that's a good statistic. It's a meaningful number. It -- it means that the labor market is doing better. Investment has been incredibly strong over the last four or five quarters. It's -- and I think some of that has to do with the tax program of 2003. So I think there are a lot of positive things. It was surprising that job growth wasn't stronger earlier on in the recovery, I agree with that, that that was surprising. But it had.

CHARLIE ROSE: And why was that?

ROBERT BARRO: Well, I don't think it is completely well understood why. I think it does have something to do with the fact that productivity was growing so rapidly. So that meant that in the short run that businesses didn't seem to have to hire as many workers as before.

CHARLIE ROSE: They were acting -- acting with more efficiency?

ROBERT BARRO: Well, that is clearly true in terms of the data. The productivity growth has been extremely strong. And that was true earlier. But you can see some of that is just in the numbers. If GDP growth is doing pretty well and the number of people employed is not rising that fast, that has to mean that productivity growth is doing strong. But you might not like that outcome, because you want to have more job growth. I understand that.

CHARLIE ROSE: Let me ask you a political question, in Ohio, politically.

PAUL KRUGMAN: Yeah.

CHARLIE ROSE: . where there is a serious issue of jobs, yes?

PAUL KRUGMAN: Yes.

CHARLIE ROSE: Why isn't Senator Kerry way ahead of the president?

PAUL KRUGMAN: Well, we could ask that nationally. But you know, there are.

CHARLIE ROSE: OK, we'll ask you nationally, both times, tell me what is it? Is it simply because, as I read the other day, and it talked about and you both know about, the idea that people look at questions of cultural issues versus economic issues, and people seem to be more voting in response to cultural questions than economic questions?

PAUL KRUGMAN: Well, look, if truth to be told, I think it's -- it's even more -- culture is part of it -- but national security. I mean, this is an administration that -- that has wrapped itself in the flag over national security issues, and that for a lot of people, if people believe its characterization of itself as, you know, we're going to keep you safe. If the question is between the candidate who might do more to help you get a job and the candidate who is going to keep your kids from being killed, people are going to vote for the candidate they think is going to keep them safe. I think without the national security issue, this would be a blowout for -- for whoever was not in office.

CHARLIE ROSE: Let me come back to tax cuts. If, in fact, Senator Kerry is elected, and if, in fact, he is able to go forward with his program to roll back tax cuts for those making more than $200,000 a year, what impact do you think it will have on the economy and reducing the deficit?

ROBERT BARRO: Well, that in itself would I think have a small negative impact, analogous to the kind of effect early on in the Clinton administration where they raised those tax rates, or if you go back to the first Bush administration. There was a similar kind of increase in rates that affected people at the top. It is not going to be a major consequential effect, but it will be negative. It will be something slightly adverse for the economy, unless it's a really big increase. Then it would be very negative.

PAUL KRUGMAN: Well, I don't see that there was negative effect from the previous one. But Robert is right, actually. Then it happens.

CHARLIE ROSE: There will be a negative effect on the economy?

PAUL KRUGMAN: No, no, but he is right about the scale of it. I don't think it would have a negative effect. Because I -- I think that we have a problem of demand, not supply. And we have a problem of spending, not incentives. And since, in fact, Kerry is proposing to -- to use the bulk of any additional revenue for new government programs, doesn't do much for the deficit, actually. But it -- it also doesn't do anything to depress spending. And at the point about the scale of it, the scale of what Kerry is proposing is, in fact, almost identical to the Clinton '93 tax increase, which did not exactly sink the U.S. economy. So, you know, you can't make the case that this is a major thing one way or the other.

CHARLIE ROSE: So, what kind of conservative is George Bush?

ROBERT BARRO: Well, it is a mixed bag. I mean, as I mentioned earlier, I think the tax cutting program, particularly in 2003, was very sound. A lot of conservative has to do with the national security issues, which as you mention, and Paul mentioned it is probably paramount in the election. In other respects, he is not so conservative, particularly on the expenditure side. And this of course is not getting into the social conservative issue.

CHARLIE ROSE: But he is not spending enough to satisfy you.

PAUL KRUGMAN: Well -- you know -- he's spending.

CHARLIE ROSE: Or different priorities?

PAUL KRUGMAN: Different priorities. And look, he has not, what -- what I fear -- what I fear politically, not economically, is that he's -- that the only way to make sense of his tax cuts is eventually to have sharp cuts in social programs, in Social -- the Social Security and Medicare, which I think are good programs. There has been some runaway spending on a few things, but it is not a big share of what has happened to the budget. It's a problem. I just have to say, what kind of conservative, or better what kind of Republican is Bush? And the answer, of course, is he is a banana Republican. Just look -- look at the fiscal irresponsibility.

CHARLIE ROSE: What is a banana Republican?

PAUL KRUGMAN: He basically cut taxes without get out -- having any plan to cut spending, or any -- you know, just let it -- let it -- let it rip. Somehow or other financial markets will provide.

ROBERT BARRO: You can't go that crazy about the deficit. It's a little over 3 percent of the GDP now.

CHARLIE ROSE: That is what they always say, I mean they make that a percentage of GDP defines -- that it is a more important number than the size of the deficit.

ROBERT BARRO: Oh, no.

PAUL KRUGMAN: I agree.

(CROSSTALK)

ROBERT BARRO: I think everybody would agree that that's the right way.
CHARLIE ROSE: Right.

ROBERT BARRO: To look at it. And, you know, maybe that's somewhat too big. I think it is mostly too big because of the expenditure side, lack of discipline. But I don't think that that is a major problem going forward. I don't think that is having any important impact, itself, on the economy. And the question is what are you going to do next? And particularly what are you going to do to promote economic growth. But one thing that I think that Bush would do in a second term, which would fit more into your conservative agenda, would be in terms of having some kind of.

CHARLIE ROSE: In his conservative agenda.

ROBERT BARRO: His, or anybody's.

CHARLIE ROSE: Right. A conservative agenda.

ROBERT BARRO: Would be on the Social Security side in terms of introducing some kind of private accounts, not changing the pensions for the existing retired people or people close to it, but down the road, people who are younger.

CHARLIE ROSE: How far down the road?

ROBERT BARRO: Well, that is something that has to be argued out. But you know, you can imagine going up to somebody in early 40, but that -- that's something you would have to go through. But the idea would be to have a transition where a lot more in the next generation is going to be in terms of personal accounts, rather than the kind of plan that we've had since the 1930s.

PAUL KRUGMAN: Well, I think it is a terrible idea, but even aside from that, it is very expensive. Because the real problem in any of these things, is what about the guy somebody -- well, my age, your age, we have been paying into the system all our lives. We don't have a private account. Where is the -- where's the money going to come from to pay for our retirement? You and I don't need it, but -- but a lot of people do. And then -- and you start to say well, we're going to finance that. Anyway you cut it, you need several trillion dollars of additional -- in additional money injected into the system to make any of these things work, to cover the transition. I don't think it is a good idea to do it in any case, but to cover this transition for all the people who've been paying into what has been a pay-as-you-go program, where each generation supports the previous generation in its retirement. And this -- this has never been explained how it is going to -- ever going to work. And it is just -- the arithmetic -- I mean, they had a commission, tried to produce plans. And each of the plans they produced had this little asterisk that said "funds to be provided from elsewhere," which turned out to be in the trillions of dollars.

ROBERT BARRO: I'm surprised you make that argument as an economist. I mean, of course, you have to honor the commitments that you've made in this program to people to pay their pensions. What you have now is a situation where there is a big public debt out there in the form of future Social Security payments. So it's not an official part of the public debt, but it's just like it. And, of course, the transition is where you increase the literal debt in order to fund it, you have to borrow. But you're replacing implicit debt, which is the pension payments you are owing, with explicit debt.

CHARLIE ROSE: Do you -- either of you believe that they will have -- whether it is Kerry or Bush, that they will reduce the deficit in half by 2008?

PAUL KRUGMAN: You know, I believe that neither of them has a program to do that.

CHARLIE ROSE: Right. It's a better answer.

PAUL KRUGMAN: Neither of them has a program to do that. Kerry -- I believe that if Kerry wins, he actually will, because I actually think that we are going to get a very Clintonesque team in there, but it is not in the program. Bush, I think, will increase the deficit drastically if he gets a second term.

ROBERT BARRO: Well, I don't think that's right. As Paul said before, the thing that really eliminated the deficit in the '90s was the rapid growth of the second half of the 1990s. So the central thing is whether the economy is going to grow well, which I think there is a good chance of that. But I can't be sure of that. And I think that Bush would have a lot more spending restraint in his second term than he had in the first one.

CHARLIE ROSE: Why do you think that?

ROBERT BARRO: Because I think he has done some of these programs that he wanted to do, particularly on education and Medicare. And I think that he is going to go beyond that to -- to maintain more of a balance in the government.

CHARLIE ROSE: You know -- do you comprehend the Kerry health care plan? I don't mean that in the way it sounds, but he is in love with it.

PAUL KRUGMAN: I'm in love with one piece of it, and I think it is just brilliant, which is the catastrophic health care. The taking of -- having federalizing most of the cost of catastrophic health expenses is actually a very smart idea.

CHARLIE ROSE: Is it? In your judgment?

ROBERT BARRO: The catastrophic part is the main part where the government should have some involvement. The problem with the current system.

CHARLIE ROSE: That was almost (UNINTELLIGIBLE), isn't it, you know, a kind of .

PAUL KRUGMAN: Yes, it's -- it's -- and -- and the reason why it is so smart, is this is a surprisingly large part of health care expenses. And insurance companies spend enormous resources trying not to cover those people.

CHARLIE ROSE: Right. Right.

PAUL KRUGMAN: And yet we end up covering them one way or another anyway. So this is just something that actually completely eliminates a lot of waste in the system.

ROBERT BARRO: The problem with the current system is we have all this insurance for covering things that are not catastrophic. It is really too much coverage for everything else, and I think that helps to build up the expenditures. But I mean, Kerry is not very good on the other side, in terms of the medical liability problem, particularly since he has a trial lawyer running with him on the ticket. One of the other problems driving up the health care costs is definitely on the malpractice insurance side.

PAUL KRUGMAN: That's -- it's a tiny issue that is blown up into something enormous, because it suits an ideology. It just is not a big part. Even the insurers say the caps on liability would not do a lot to change the expenses.

CHARLIE ROSE: Let me -- let me ask to change it, finally. You know, I have read and I don't know the numbers clearly, 44 million Americans are uninsured.

PAUL KRUGMAN: Yes.

CHARLIE ROSE: That just seems to me.

PAUL KRUGMAN: Forty-five, I think.

CHARLIE ROSE: OK, I say 44, you say 45.

PAUL KRUGMAN: Yes.

CHARLIE ROSE: That's incomprehensible to me. I mean, it seems so basic, the necessity to be free from the fear of not being able to have health care.

ROBERT BARRO: What am I missing? Why am I naive? Health care is central, and certainly catastrophic insurance coverage is central. But I think one of the problems is -- we have gotten into this mind-set where we think that people should be covered for everything, including all the routine things. And we've expanded the system far too much, mostly based on people getting health insurance coverage through their employers. And we're very much subsidizing that through the tax system. This is a big mistake in how the system is structured. You are sort of used to the idea that everybody is covered for almost everything with respect to health.

PAUL KRUGMAN: But.

ROBERT BARRO: That's a mistake.

PAUL KRUGMAN: No, I -- just -- well, I mean this is -- yes, it's crazy. I mean, we are the richest country in the world, and yet there is this enormous insecurity. And it is more -- it is not always the same 45 million people. Over a two-year period it is really about 70 million people who go through some spell of not being covered. And that's a lot of people having terrible anxiety, and this is -- we should not -- this is absurd, this is grossly unfair and one of the incredible failings, and a lot of those people are children.